New York Markets After Hours

No Greek CDS payout on swap, panel says

Investors will have more opportunities to argue ‘credit event’ occurred

By

WilliamL. Watts

FRANKFURT (MarketWatch) — Greece’s restructuring of privately-held debt so far hasn’t met the threshold of a “credit event,” failing to trigger billions of dollars in payouts on derivative instruments known as credit-default swaps, a panel of bankers and investors ruled Thursday.

The meeting of the International Swaps and Derivatives Association’s Determinations Committee on Thursday came after an anonymous query was submitted to the trade group requesting a ruling on whether preferential treatment of Greek bonds held by the European Central Bank and some national central banks amounted to a “credit event.”

ISDA is a global trade group that is the arbiter of whether payouts on CDS contracts have been triggered.

The panel, which met by teleconference in London and New York, ruled unanimously that the move didn’t constitute such an event. They also ruled that the private debt swap initiated last week as part of the country’s second international bailout hadn’t met the threshold.

Has Greece defaulted or not?

(6:07)

Officials from the International Swaps and Derivatives Association have stated that Greece has not had a "credit event" and will not trigger credit default swap payments. Dow Jones's Jenny Paris and Katie Martin explain why this decision is not clear cut. Photo: AP

But the panel also noted that the situation in Greece is “still evolving” and that market participants can submit further questions to the body “as further facts come to light.”

A credit event would require market participants who issued credit-default swaps, or CDS, on Greek government debt to pay out to investors who had bought the derivatives as a hedge against nonpayment or a speculative bet. Read about Greek CDS exposure.

Investors hold net exposure of around $3.2 billion on CDS covering more than $200 billion of outstanding Greek debt, a figure that’s seen as easily manageable.

Still, markets are likely to keep an eye trained on the deliberations. Strategists at Lloyds TSB in London said a CDS trigger could still “bring contagion fears back to the fore.”

The market consensus had been that the panel wouldn’t vote to trigger CDS payouts in response to the query regarding the treatment of the ECB, said Gavan Nolan, director of credit research at data provider Markit.

The euro
EURUSD, +0.04%
traded at $1.3312 versus the dollar, down 0.1% from Wednesday. European equities traded higher.

It was widely reported that the ECB moved last month to swap its holdings of Greek government bonds, receiving identically structured paper in return. The new bonds, however, weren’t subject to collective action clauses inserted retroactively by the Greek government into existing debt.

Those clauses would allow bondholders holding a majority of Greek debt to compel all private bondholders to participate in the debt swap currently under way as part of Greece’s second international bailout.

Under the swap, private bondholders will take a haircut of 53.5% on the value of Greek bonds, exchanging existing debt for new bonds that pay lower interest rates and carry longer maturities.

Many analysts contend a credit event is likely to be declared if the CAC clauses are triggered. And there’s a high possibility of that occurring since around a quarter of Greek bonds appear to be held by hedge funds and other investors seen as unlikely to be keen to tender their shares in the swap.

“Uncertainty on the second package will remain until the March 12 deadline when private bondholders will have to decide whether or not to participate in the ‘voluntary’ debt exchange,” said Tobias Blattner, euro-area economist at Daiwa Capital Markets. “Only if the participation rate will be high enough, the package can go ahead as planned and the payout of CDS contracts might be avoided.”

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